Module E Flashcards
What is the objective of sampling?
To make a statement about a population of interest
Why sample?
Examining 100% is cost prohibitive
When is sampling used?
When effectiveness can be traded for efficiency…
- Need for exact information is less important
- Number of items comprising the population is large
Uses of Sampling in Auditing
- Study and evaluation of internal control
- substantive procedures
Study and evaluation of internal control - sampling
Selecting control attributes to verify effectiveness
Substantive procedures - sampling
Selecting components or transactions of account balances for verification
Audit Sampling
The selection and evaluation of less than 100% of the items in a population of audit relevance selected in such a way that the auditor expects the sample to be representative of the population and thus likely to provide a reasonable basis for conclusions about the population.
Sampling Risk
Likelihood that the decision based on the sample differs from the decision that would have been made if the entire population were examined
What is the cause of sampling risk?
a non-representative sample (i.e., sample does not represent the population)
How can sampling risk be controlled?
- Determining an appropriate sample size
- Ensuring that all items have an equal likelihood of selection
- Adjusting for sampling risk
What are the two types of sampling risk?
Type I: Risk of incorrect rejection
Type II: Risk of incorrect acceptance
Type I: Risk of Incorrect Rejection (Internal Controls)
the risk that the sample supports a conclusion that the control is not operating effectively when, in fact, it is operating effectively
Type I: Risk of Incorrect Rejection (Substantive Testing)
the risk that the sample indicates that the recorded balance is materially misstated when, in fact, it is not
Type II: Risk of Incorrect Acceptance (Internal Controls)
the risk that the sample supports a conclusion that the control is operating effectively when, in fact, it is not operating effectively
Type II: Risk of Incorrect Acceptance (Substantive Testing)
the risk that the sample supports the recorded balance when it is, in fact, materially misstated
Nonsampling Risk
Incorrect conclusion unrelated to the nature of the sample (Errors of judgment or execution)
How is nonsampling risk controlled?
- Training and supervision
- Reasonable working conditions
- Effort
What are the different approaches to sampling?
- Statistical sampling
- Nonstatistical sampling
Statistical sampling
applies laws of probability in selecting sample items and evaluating sample results
What does statistical sampling allow the audit team to do?
control exposure to sampling risk
Nonstatistical sampling
does not use probability in sample selection and evaluation
What does nonstatistical sampling allow the audit team to do?
Does NOT allow audit team to control exposure to sampling risk
Both statistical sampling and nonstatistical sampling are appropriate under ________, as long as results are __________
GAAS; consistent
What are advantages of statistical sampling?
- Design an efficient sample.
- Measure the sufficiency of evidence obtained.
- Quantify sampling risk.
What are disadvantages of statistical sampling?
- Training auditors in proper use.
- Cost to design sampling application.
- Lack of consistent application across audit teams.
What are the steps in sampling?
- Planning
- Performing
- Evaluating
Steps in Sampling: Planning
- Determine the objective of sampling
- Define the characteristic of interest
- Define the population (needs to be clear)
Example of planning steps of sampling:
- Does brand of golf ball provide increased distance of 5 yards?
- Golf ball distance
- All amateur golfers
Steps in Sampling: Performing
- Determine sample size
- Select sample items (should be representative and available)
What are the methods of Selecting Sample Items?
- Unrestricted random selection
- Systematic random selection
- Block selection
- Haphazard selection
Unrestricted random selection
Select items based on random numbers matched to items in population
Systematic random selection
Bypass a fixed number of items in population, selecting every nth item
Block selection
Select contiguous units
Haphazard selection
Select items in a nonsystematic manner
Steps in Sampling: Evaluating
- Measure sample items
- Evaluate sample results (make conclusions about the population at large)
Attribute Sampling
Used to estimate the extent to which a characteristic (attribute) exists within a population
When is attribute sampling used?
In tests of controls
If the upper limit rate of deviation is less than or equal to the tolerable rate of deviation for attributes sampling…
rely on controls as planned
If the upper limit rate of deviation is greater than the tolerable rate of deviation for attributes sampling…
reduce planned reliance on controls
Risk of Overreliance
Risk of Assessing Control Risk too Low
When does risk of overreliance occur?
Sample indicates controls are functioning effectively and controls are not functioning effectively
What is the result of the risk of overreliance?
- Auditors conclude that controls are functioning effectively
- Effectiveness loss (do not reduce audit risk to sufficient level)
Risk of Underreliance
Risk of Assessing Control Risk too High
When does risk of underreliance occur?
Sample indicates controls are not functioning effectively, but the controls are functioning effectively
What is the result of the risk of underreliance?
- Auditors conclude that controls are not functioning effectively
- Auditors assess control risk at higher than necessary levels
- Efficiency loss (perform more effective substantive procedures than necessary)
If the upper limit on misstatement is less than or equal to the tolerable misstatement for variables sampling…
Account balance is not misstated
Variables Sampling
Used to estimate the amount (or value) of a population
Used in substantive procedures
If the upper limit on misstatement is greater than the tolerable misstatement for variables sampling…
Account balance is misstated
Risk of Incorrect Acceptance(Type II) occurs when…
The sample indicates the account is not misstated but the account is misstated
What is the result of an incorrect acceptance?
- Auditors conclude that account is not misstated
- Effectiveness loss (issue incorrect opinion on misstated F/S)
Risk of Incorrect Rejection(Type I) occurs when…
Sample indicates account is misstated, but the account is not misstated
What is the result of an incorrect rejection?
- Auditors conclude that account is misstated
- Auditors perform additional procedures
- Efficiency loss (perform more effective substantive procedures than necessary)
Effectiveness losses:
- Risk of overreliance
- Risk of incorrect acceptance
Efficiency losses:
- Risk of underreliance
- Risk of incorrect rejection
What kind of effect does population size have on sample size?
Direct; As population is larger, need to sample more items
What kind of effect does expected rate of deviation have on sample size?
Direct; As auditors expect higher level of deviations or misstatements in population, need to sample more items
What kind of effect does tolerable rate of deviation have on sample size?
Inverse; As auditors require lower level of deviations or misstatements, need to sample more items
What we can tolerate goes up, we can have a smaller sample size
What kind of effect does sampling risk have on sample size?
Inverse; As auditors wish to reduce chance of incorrect decisions, need to sample more items
What kind of effect does population variability have on sample size?
Direct; As population is more variable, need to sample more items to obtain representative sample Increase sample size for a variable population to encompass the variability
Can auditors calculate an upper deviation rate for nonstatistical sampling for tests of controls?
No
